Shrinking IRS struggles to keep up with growing number of tax-exempt charities

Remember when conservatives accused the Internal Revenue Service of being too aggressive toward nonprofit tea party groups? Now the agency faces criticism for the opposite problem, this time related to a different type of tax-exempt organization.

An independent review released last month faulted the IRS for scant oversight of charities, saying the agency examined the groups less frequently while its budget and workforce steadily shrank in recent years.

With its budget and workforce shrinking, the IRS has examined charitable organizations with less frequency in recent years. (AP/Susan Walsh)

The Government Accountability Office said in its report that the IRS audited 0.7 percent of charities in 2013, down from 0.81 percent in 2011. By comparison, the agency audited individuals and corporations at rates of 1 percent and 1.4 percent, respectively, in 2013.

Meanwhile, the IRS’s budget decreased by $900 billion after 2010, and its workforce lost 10,000 full-time employees over the same period, according to the review. The staff reductions included 47 positions within the IRS’s exempt-organizations division, which examines charities, nonprofit advocacy groups and other entities that qualify for tax-free status.

“The number of employees performing exams has declined while the number of returns filed has increased,” GAO said.

In a separate report last year, GAO said that budget cuts and staffing declines have harmed the IRS’s performance, specifically with enforcement functions and customer-service.

It’s worth noting that the IRS has shown little appetite for challenging tax-exempt groups after its tea party controversy, in which the agency was found to have targeted nonprofit advocacy groups based on their names and policy positions.

Notably, the agency in recent months has taken almost no action against a new movement of pastors who preach politics from the pulpit and sometimes endorse or oppose candidates — a violation of federal law for tax-exempt religious organizations.

Taxpayers and the U.S. government have a lot to lose by ignoring the rule-breakers among tax-exempt groups.

With charities alone, the number of tax-exemption filings have increased by about 5 percent since 2011, for a total of about 763,000 in 2013. Such groups cost the government about $100 billion a year in foregone revenue, according to the Congressional Research Service.

The GAO’s report last month said the IRS’s exempt-organizations division doesn’t have a handle on how well its oversight efforts are working, because it has not developed a system for measuring the outcomes.

“Because EO does not measure the current level of compliance, it cannot set goals for increasing compliance or know to what extent its actions are affecting compliance,” the review said.

The IRS said in a response letter that its exempt-organizations division would “refine its compliance strategy and approach” to determine how enforcement actions are affecting compliance with charitable groups.

The agency also said it had launched new initiatives to “assess and promote compliance by these organizations,” adding that it planned to do statistically valid random reviews of tax-exempt organizations.